Question

An 8 - year corporate bond has 7% coupon rate. What should be the bond's price if he required return is 6% and the bond pay interest semiannually?

Answer 1

	CALCULATION OF PRESENT VALUE OF THE BOND IF THE INTEREST PAID SEMI ANNUALLY
	Step 1 : Calculation of Annual Coupon Payments
	Par value of the bond issued is   =			$1,000
	Annual Coupon %			7.00%
	Annual Coupon Amount			$70.00
	Semi Annual Coupon Amount			$35.00
	Step 2: Calculate number of years to Maturity
	Number of years to maturity = 8 years
	Interest is paid semi annyally so total period = 8*2 = 16
	Step 3 : Caclulation of Current Market Price (intrinsic value) of the bonds
	Market rate of interest or Yield to Maturity or Required Return = 6%
	Bonds interest is paid semi annualy means so discounting factor = 6 % /2= 3 %
	PVF = 1 / Discount rate = 1/ 1.03
	Result of above will again divide by 1.03 , repeat this lat period
	Period	Interest	Amount	PVF @ 3%	PresentValue
	1	Interest	$35	0.9709	$33.98
	2	Interest	$35	0.9426	$32.99
	3	Interest	$35	0.9151	$32.03
	4	Interest	$35	0.8885	$31.10
	5	Interest	$35	0.8626	$30.19
	6	Interest	$35	0.8375	$29.31
	7	Interest	$35	0.8131	$28.46
	8	Interest	$35	0.7894	$27.63
	9	Interest	$35	0.7664	$26.82
	10	Interest	$35	0.7441	$26.04
	11	Interest	$35	0.7224	$25.28
	12	Interest	$35	0.7014	$24.55
	13	Interest	$35	0.6810	$23.83
	14	Interest	$35	0.6611	$23.14
	15	Interest	$35	0.6419	$22.47
	16	Interest	$35	0.6232	$21.81
	16	Bond Value	$1,000	0.6232	$623.17
		Total			$1,062.81
		Bonds Price =			$1,062.81
	Answer =	Bonds Price =	$1,062.81